This Week’s Developments Show Big Oil Moving into Ethanol Business

Thu, 2009-05-21 15:01

The acquisition of bankrupt Northeast Biofuels by Sunoco Inc. this week marks what will likely be a continuing trend. As the U.S. must work to meet the Renewable Fuel Standard (nearly 13 billion gallons of renewable fuels by 2010 and 30 billion gallons by 2020), the petroleum industry is looking for ways to blend more ethanol into gasoline.

At the same time, recent bankruptcies in the ethanol business are making it possible for oil companies to pick up ethanol assets for relatively inexpensive prices . . . some might say “on the cheap.”

This week, Sunoco announced it will buy the bankrupt Northeast Biofuels, near Fulton, New York, for $8.5 million. The Syracuse Post-Standard reported the purchase price “is a pittance compared with the $200 million spent in recent years to develop, build and start the plant, which just began producing ethanol last summer.” However, Sunoco could pay up to $14 million to correct some design problems with the 100-million gallon per year capacity plant.

Also this week, Valero Energy assumed VeraSun Energy’s investment in Qteros (formerly known as SunEthanol). Qteros has developed a microbe technology for converting biomass into cellulosic ethanol. Qteros plans to open a pilot plant this year.

This week also brought Pacific Ethanol’s announcement that its subsidiaries, which own four wholly-owned ethanol production facilities in California, Oregon and Idaho, have filed for Chapter 11. But, the company and its “marketing subsidiaries, including Kinergy Marketing LLC and Pacific Ag Products, LLC, have not filed for bankruptcy protection.

The largest ethanol producer on the West Coast, Pacific Ethanol is the latest ethanol producer to file for Chapter 11 bankruptcy. Several other companies have filed for bankruptcy protection over the last several months, including VeraSun Energy, Aventine Renewable Energy, Renew Energy, Cascade Grain Products, Panda Ethanol and White Energy. The bankruptcies have resulted primarily because of volatile corn and oil prices, low ethanol prices and sources of financing drying up due to the credit crisis.

Pacific Ethanol is expected to continue to manage the “plant subsidiaries” under an asset management agreement, and the marketing subsidiaries are expected to continue to market and sell the plant subsidiaries’ ethanol and feed production.

The plant subsidiaries and WestLB AG and certain other lenders under the credit agreement have agreed in principle to first priority secured debtor-in-possession financing in a maximum amount of $20 million. This is intended to enable the ethanol plants to continue to satisfy customer obligations.

What will be Pacific Ethanol’s fate? At this point, it is hard to tell. But, if an oil company doesn’t buy it, the trend would suggest that some other ethanol producer will come under an oil giant's ownership.